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The Tenth District economy weakened in September and early October. Retail sales dropped immediately following the terrorist attacks and recovered only partially in the next several weeks. In addition, the slump in manufacturing worsened, residential construction activity slowed, and commercial real estate activity declined. Energy activity also fell somewhat after increasing most of the year. In the farm economy, fall crop yields were mixed and weaker cattle prices trimmed profits for cattle feeders. District labor markets eased, as previously scheduled job cuts took effect and more layoffs were announced. Wage pressures remained minimal outside of a few skilled occupations. Retail prices and prices for construction and manufacturing materials were largely stable, while manufacturing output prices edged down.
Retail sales declined from the previous survey and were below year-ago levels in most of the district. Many stores shut down on the day of the terrorist attacks and most experienced slower than normal sales the rest of that week. Sales had recovered somewhat by the following weekend but remained below normal in most places through early October. High-end retailers generally suffered the biggest declines in sales, while large discount stores and grocery stores fared better. Retailers expect activity to remain somewhat subdued through the holiday shopping season. Motor vehicle sales in September were strong in some areas due to attractive financing packages, but remained soft in others due to consumers' unease about the economy. Dealers expect sales to weaken once the consumer incentives come to an end.
District factory activity weakened again after showing some signs of improvement in August. A greater percentage of firms reported year-over-year declines in production, shipments, and most other indicators of factory activity. In addition, more manufacturers reported declines in employment than in previous surveys. Layoffs were announced in a variety of industries, but especially among aircraft manufacturers and parts suppliers. Several firms mentioned that the biggest immediate impact of the terrorist acts was a reduction in executive air travel, which they feared could disrupt sales. Capital expenditures at district plants continued to fall along with expectations of future activity. Most plants were trimming inventories in September and planned to continue doing so. No significant material shortages were reported, and supplier delivery times were little changed despite some disruptions immediately following the terrorist attacks.
Real Estate and Construction
Residential construction activity eased in September and early October, and commercial real estate markets continued to weaken. Housing starts were down in most cities, with some cities reporting considerable declines. Many builders reported a dropoff in customer interest following the terrorist attacks and some said a few customers cancelled orders. Some builders, however, reported that demand was slowing even before the attacks. Home sales were markedly below year-ago levels in some cities, and many realtors reported reductions in buyer traffic. Mortgage demand held steady in September as increased refinancing activity made up for fewer home purchase applications. Commercial real estate activity declined somewhat further, with construction, rents, and absorption all showing more weakness. Vacancy rates were higher than a year ago in nearly all district cities, and slightly higher than in the summer. Commercial lending standards were reported to be slightly tighter than in the previous survey.
Bankers report that loans decreased and deposits increased since the last survey, reducing loan-deposit ratios. Demand fell for commercial and industrial loans, consumer loans, and commercial real estate loans. A number of bankers attributed the weaker demand for these categories to increased caution on the part of borrowers, some of whom are making a greater effort to pay down their loans. On the deposit side, increases in demand deposits outweighed declines in large CDs. All respondent banks reduced their prime lending rates since the last survey, and almost all banks decreased their consumer lending rates. A few banks tightened their lending standards, citing the slowdown in the economy and the increase in uncertainty.
Energy activity in the district declined in September and early October. The region's count of active oil and gas drilling rigs continued to fall from a 14-year high established in July, reaching a six-month low in the first week of October. Some producers attributed the decline in drilling to the steep fall in natural gas prices since last winter, which has discouraged the drilling of marginal wells. District sources expected natural gas prices to remain fairly low through 2002, but believe long-run prospects for the energy industry are still favorable.
Fall crop yields were mixed across the district, and district cattle feeders suffered some decline in profits. With the fall harvest almost complete, corn and soybean yields in the southern part of the district were below normal due to adverse weather over the summer. Elsewhere, yields were average or better. Rainfall came in time for planting of the district's winter wheat crop, which is generally ahead of schedule. Large supplies of market-ready cattle put downward pressure on finished cattle prices, trimming profits for district cattle feeders. Bankers reported that small business activity in rural areas was sluggish, continuing the slowdown that began prior to the terrorist bombings.
Wages and Prices
District labor markets eased in September and early October, as sizable job cuts were announced and previously announced layoffs took effect in many parts of the district. Employers were reported to be taking more time in screening and hiring new workers, with many having a waiting list of applicants for the first time in several years. Several retailers said they would not be hiring as many temporary holiday workers as in previous years. Worker shortages persisted, however, for nurses and skilled construction trades. Wage pressures remained minimal outside of these fields. Several contacts reported that there has been a definite shift in unions' focus from wages to working conditions over the last six months. Retail prices were flat for most items, although several stores lowered prices to clear excess inventory. Most store managers expect flat prices through the remainder of the year. In the manufacturing sector, input prices were flat and output prices fell slightly. Both input and output prices are expected to edge up in coming months. Builders reported that prices for most construction materials were stable.